Thanks to ladybroadoak.blogspot.com (Virginia) for the link to this excellent article of economic history. It is still highly relevant. They (the neocons and neolibs) are still up to these same dirty tricks.
The following is a series of extended excerpts from: "Chile's Failed Economic Laboratory: an Interview with Michael Hudson," by Standard Schaefer. CounterPunch. October 20, 2003. [The entire piece is well worth reading more than once.]
Professor Michael Hudson is an independent Wall Street financial economist. After working as a balance-of-payments economist for the Chase Manhattan Bank and Arthur Anderson in the 1960s, he taught international finance at the New School in New York. Presently, he is Distinguished Professor of Economics at the University of Missouri (Kansas City). He has published widely on the topic of US financial dominance. He has also been an economic adviser to the Canadian, Mexican, Russian and US governments. His books include Trade, Development, and Foreign Debt (Pluto, 1992, 2 vols.). He is the author of Super Imperialism.
Standard Schaefer is a freelance journalist.
In acknowledging the recent thirtieth anniversary of the US-sponsored coup that brought to General Augosto [sic] Pinochet to power in Chile, a number of articles and opinion pieces have appeared. The Nation recently cast the incident in somewhat sentimental terms. Such efforts to turn Salvador Allende's death into a martyrdom for democratic socialism obscure the most important legacy of the coup. Not only did it give rise to one of the twentieth century's most violently repressive regimes, it inspired subsequent financial dictatorships to use privatization schemes to consolidate their power.
In the following interview, Michael Hudson elaborates on the Chicago Boys' economic legacy and its continuing implications.
MH: What seems to have upset Mr. Kissinger was the fact that socialism came to power through democratic election. It was a basic axiom of right-wing "free market" philosophy that socialism could only take over by dictatorship. Allende's victory showed this premise to be wrong. So a theory of society and doctrine of the global future was being threatened.
A second axiom was that socialist planning could not provide a prosperous economic environment, and especially that prosperity could not be gained by breaking away from what now is called the Washington Consensus. Under Allende, Chile sustained a hefty 8.9 percent increase in its GNP and at first succeeded in reducing the country's inflation rate. During his nearly three years in office he gained support by providing the poor with better access to housing, education, food and health care than previously.
Kissinger felt that the United States needed to show that socialism was bound to fail economically. Rather than leaving this to the "free market," America used the famous "invisible hand" not Adam Smith's invisible hand of free enterprise, but the covert hand of CIA destabilization.
As would become the case in Russia in the 1990s, the aim was simply to get property into private hands, regardless of how this occurred. So the government gave away companies for no money down. The idea was that the buyers would pay the government out of their earnings, ending up with the companies without having to put up money but paying money into the national treasury rather than draining it, on the theory that government enterprise was inherently bureaucratic and money-losing.
The theory had no counterpart in reality, but was a figment of the neoliberal imagination. Most of the sales naturally were to cronies of the military, who took over the companies and simply kept the income for themselves. They sent as much of it abroad as they could, and then let the companies go bankrupt. Their objective was a short-term gain, because they lived in the short run. So by 1980, within about five years, most of the companies reverted to government ownership.
The first wave of privatization thus ended in collapse. It was a dress rehearsal for what happened in Russia under Yeltsin what became the Washington Consensus after 1980.
If countries have to privatize their public domain and sell off natural monopolies traditionally owned and operated by the state, then they obviously are effectively insolvent and indulging in the equivalent of a bankruptcy sale under distress conditions. Yet countries are sovereign and don't really have to submit to this sort of financial blackmail. So the debt burden rests ultimately on their own behavior and how they manage their financial diplomacy, subject to coercive measures taken by the creditor nations.
...Is it real growth when the increase in output is being exported while living standards fall and Chileans consume and invest less? There was a statistical impression of growth, but property was becoming enormously concentrated through financial means, while the domestic economy ran deeply into debt.
What happened is that the early privatizers bled their companies while selling shares to the workers at prices that were being inflated by the flow of wage set-asides into the stock market. This is just what the U.S. money managers would like to do with America's Social Security system to create a stock market boom today. In Chile's case the companies were allowed to collapse after their managers had unloaded their stock holdings to the workers' pension funds.
Pinochet and his Chicago advisors called this "Labor Capitalism," and the term was picked up by Mrs. Thatcher in Britain. But of course it was not designed to benefit labor at all. Rather, labor was left holding the bag when the stock market collapsed.
I also should point out that management fees for labor's forced savings were so high that they absorbed the entire flow of dividends. Thus, labor was not able to reinvest the earnings on its savings to grow and multiply. The financial sector got the benefit of this principle of compound interest, not the employee-contributors.
MH: The Social Security System's vast holdings of U.S [sic] Treasury bonds are to be sold and the proceeds steered into the stock market. This will create a financial bubble in which Wall Street and foreign institutional investors will reap quick capital gains while management fees absorb the dividends being paid by these stocks. Meanwhile, the Federal Reserve will buy the Treasury bonds being sold, pumping credit into the financial system to fuel asset-price inflation. All this will be called "wealth creation."
At the point where more workers retire than are being employed, the stock-market inflow of savings will turn into an outflow. Stock market professionals will bail out, leaving workers holding stocks whose price has plummeted.
Politicians will wring their hands and refer to the madness of crowds and the short-sightedness of greed, blaming the hapless workers whose forced savings were mismanaged rather than seeing how the bubble and its collapse were orchestrated from the outset.
MH: Under Allende the workers' paychecks were not docked and turned over to their employers to manage (or later to American insurance companies and other foreign financial institutions). This meant that labor could spend its entire wages on current output, creating a thriving domestic market for Chilean output. This is necessary to help the economy grow by the feedback between demand and new investment and employment.
Diverting wage income into the stock market and other forced saving slows the growth of spending. This is antithetical to Keynesian-type market stimulus. It may promote a financial bubble but at the cost of austerity for consumption and direct investment. That is the basic folly which underlies IMF austerity plans and neoliberal Chicago planning generally.
Chilean stocks rose because labor's savings were being channeled into a rather small number of stocks in the large companies controlled by the oligarchy. Companies steered the savings of their workers into their own stocks. But these savings were not used to finance long-term capital investment in new plant and equipment, research or development. The financial bubble was decoupled from the "real" economy. That was the essence of Pinochet's "labor capitalism."
It is in the nature of financial markets that ready cash is the name of the game. When investors can get something for nothing, they will take it by the path of least resistance. Why go to all the trouble of tying up one's own capital to produce and market goods and services when you can leapfrog the process by making money in purely financial ways?
MH: They are quite willing to see capital assets sold off on the cheap. They also ignore the role of debt leveraging. In Chile's case they said nothing about the way this transferred risk from the private to the public sector, even though they defended high rates of return as a reward for the private sector ostensibly taking risks.
The effect of their monetarist policy is not to increase competition by a proliferation of small firms as they allege, but to promote large monopolies financed on credit. And the effect of shunning government planning is to put the economy in the hands of foreign finance capital. Planning remains, but it takes place far from the source and at the expense of the middle class and labor.
Something that neither they nor Karl Marx foresaw has occurred. Labor is being exploited by its savings as well as its wages. Chilean wages long remained lower than their 1974 level. Far from being a miracle, Chile was an embarrassment. Yet the neoliberals did not seem to care. They went on to repeat their monetarist program in other countries, most notoriously in Russia.
MH: Like lawyers defending a guilty client, the Chicago Boys only look for good things to say about their pet project. They want to portray Chile in as good a light as possible. They really are using a public relations cover story as an excuse to give away government enterprise on the cheap to their backers. This is why they need to censor any criticism or alternative proposals. It also is why the IMF does not release its critical reports on Chile's Social Security privatization. The policy is generating billions of dollars for financial managers across Latin America. The Chicago Boys don't care about labor's savings that are being dissipated.
One of the most time-tested tactics of defense lawyers is to mount a character assassination on the accusers and witnesses. This is what the Chicago monetarists do in claiming that government regulation and taxation lead to serfdom. They repeat over and over again that public planning leads to disaster, as if this implies that the private-sector financial planning that takes its place does not lead even more quickly, more directly and more inevitably to economic disaster, poverty and polarization.
In this sense Chicago economics remains all about the "invisible hand," in the sense that their doctrine makes this hand "invisible" to the students that they are turning into "useful idiots" for the financial sector to hire to promote its policies. If they were to permit an open discussion of alternatives, their opponents would point out the shortcomings of their policies. A cloak of invisibility is essential as far as these problems are concerned.
The term "democracy" these days has lost its original meaning of majority rule. It has become a code-word for pro-American policies and hence a dictatorship by the banking and financial interests. To "promote democracy" is what America claims to do in overthrowing elected governments and turning planning over to unelected bankers and money managers. Such is the Orwellian semantics of today's global political economy.
It pays well to be a useful idiot in today's world. Students don't enroll in the University of Chicago's business school to make the world a better place and raise living standards. They enroll because they want to make money for themselves. The way they are taught to do this is to make money financially, not by industrial engineering or social reform.
MH: Chicago-style laissez faire can only be imposed at gunpoint, in conjunction with academic censorship of empirical economic study and history. Political dictatorship is an inherent "externality" of "free markets," because it is only a rhetorical wrapping for centralized financial and political coercion.
MH: Chile has become the test case for the paternalistic Washington Consensus. These institutions want to make Chile an object lesson to show that financial dictatorships run by client oligarchies "work," and that America was right to save Chile from its voters who elected a socialist regime. It goes hand in hand with U.S. attempts to destabilize Venezuela's economy under Hugo Chavez, and Cuba after that.
To the IMF and World Bank, "austerity" means cutting back domestic income mainly wages to pay foreign creditors. Their error lies in the failure to recognize that imposing austerity destroys the domestic market. This reduces domestic investment, thereby increasing foreign dependency. This turns out to be inflationary when the currency collapses as a result of a worsening trade balance and capital flight. So rather than stabilizing the economy "austerity" should be seen as a destabilization plan. That is why the English language has been expanded to include the term "IMF riot." The phenomenon is now recognized as an inherent stage of austerity programs.
...Wage levels and social infrastructure spending fell from the levels achieved under Allende or his predecessor, Frei. The economy became unbalanced and polarized.
If you're talking about Chicago-style free-market economics, it only can work at gunpoint, by taking total control of the educational system. The doctrine is so narrow-minded that once you permit a non-autistic economic curriculum based on empirical experience and actual history, you are not going to have students accepting the self-destructive financial doctrines of the Chicago Boys. Free enterprise of the type that replaces government planning with that of large global financial institutions requires totalitarian governments to enforce. That's what Harberger and Pinochet recognized when they closed down the economics departments at every university in Chile except for their bastion at the Catholic University. They drove non-monetarists into exile or arrested or "disappeared" them. This is why Chicago-style anti-government doctrine represents today's new road to serfdom.
There is no intrinsic need for such shock. At least there would not be if it were not necessary to defend against U.S. and European covert destabilization plans using terrorism. ...
The Roman Republic provides a good parallel. When the Gracchi brothers promoted land and debt reform after 133 BC, the oligarchs fought back and murdered the leading democratic politicians. The problem of violence stems from the counter-revolutionaries much more than from reformers.
Most reformers recognize what Gandhi understood: Property owners control the state and its police. So violence cannot be a winning policy for economic reform. But violence is the last resort of the anti-reformers. It worked in Iran against Mossedegh in 1964, in Guatamala [sic] against Arbenz, and in many other countries.
The Pinochet regime is gone as a political and military force, but it has left a residue of unequal wealth distribution. Ownership of Chilean business is now in the hands of an oligarchy rather than being widely distributed. The press and media are owned by the oligarchy. Socially, Chile is plagued with what might be called "wealth pollution" in the form of an economically inequitable society. The "cleanup costs" of these developments have not been calculated.
MH: Chile still provides the basic privatization model. It provides an object lesson for the fallacy of creating capital by giving public enterprise away to insiders, and of getting rich by merely financial means without underlying industrial investment.
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